Writing about random topics

How much money do you need to retire?

Recently, I picked up Ken Fisher’s book The Ten Roads to Riches. Fisher runs Fisher Investments and has been writing a column in Forbes magazine for over 25 years. He’s also on the Forbes 400 list as one of the richest people in the United States, with a net worth of somewhere between $1 billion and $2 billion, and is a financial manager. Because he is so successful, he is someone with credibility who I should listen to (free advice to anyone: if anyone gives you financial advice, you should only consider following it if they are more financially successful than you or have way more experience doing something than you do).

The book is an entertaining book but the one chapter I focused on is the last one because that’s the road that I am going to follow that leads to my riches – Save and Invest Wisely.

Fisher has a formula for determining how much money you need to retire with. He advises clients to withdraw a maximum of 4% of their retirement portfolio per year in retirement. So, if you have $100,000, 4% of that is $4000/year. This is to keep pace with inflation and making sure your balance doesn’t go to zero (i.e., when you withdraw money, the market will keep going up so you will replenish what you withdraw and even if you don’t, you will most likely outlive your withdrawals).

Let’s assume that you want to live on $50,000/year. This sounds high but remember while your living expenses go down as you get older when you pay off your mortgage, your medical expenses will go up. But what about inflation? How much in tomorrow’s dollars will you need to live on equivalent of $50,000 today?

The mathematical formula for that is the following:

If your time window is 30 years (n) and the rate of inflation, i, is 3% (which is the historical average, then plugging those numbers into the above equation (Present Value = 50,000), then you would need $121,363/year to live on.

How much do you need to save up in order to live on that? Well, if you only withdraw 4% per year, then you need:

All you need to do is save $3 million.

WHAT!?!

Calm down, it’s not as bad as it sounds. You need to take advantage of compound interest. If the market’s average rate of return is 9.9%, and you want to live on $50,000 in today’s dollars per year, in 30 years, the formula for how much you need to save is the following:

Using the above numbers, your payment PMT is $18,797 per year, or $1566 per month.

Unfortunately, $18,797 per year sounds like a lot of money to save and invest per year. It is. That’s why you have to be very aggressive about your savings and investment plan or make different assumptions about how you want to live in retirement.